Our lousy performance this year was primarily due to our short position in Tesla, whereby despite having an overwhelming number of facts on our side (detailed, as usual, below) the stock was up nearly 46%. However, following a considerable amount of recent bad news for the company that trend may have finally reversed, and the stock now trades below its 200-day moving average. Although as a value investor it’s been tough to find new companies cheap enough to buy in this free-money-driven “everything bubble,” this month we did add a couple of new “deep value” long positions while we continue to have a number of short positions that I think will work out quite profitably in 2018.

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In December Congress passed a tax reform bill that left the $7500 electric vehicle tax credit in place, and thanks to its gradual phase-out provision Tesla buyers will thus be able to apply the full credit to approximately 100,000 more U.S. market cars in 2018. After that however, Tesla will have a major price disadvantage vs. over 100 new EV models entering the market over the next few years as its credits will have expired (after first being cut to $3750 and then $1875 during the phase-out period) while much of the competition is just getting started with a full $7500 credit.Additionally, pricing for much of that new competition will be cross-subsidized by highly profitable conventionally powered trucks and SUVs. So if you think Tesla loses a lot of money now trying to sell cars (and it sure does!), wait until you see what happens in late 2018!

Also in December, Tesla claimed several hundred “reservations” from “marquee names” such as Pepsi, Anheuser-Busch and UPS for its attempt at a Ponzi-financed electric semi-truck (not to be confused with its Ponzi-financed Roadster– in fact the whole company is becoming a maker of electric Madoff-mobiles) yet those companies explicitly refused to say whether they’d given Tesla any money up-front. So here’s what almost certainly happened here: Musk (or one of his salespeople) called those companies and said “Hey, if in a few years I can charge you $180,000 for a 500-mile electric semi-truck with a one million-mile warranty and electricity subsidized at .07/kWh and I don’t charge you anything up front, could we tell the media that you’ve made some ‘reservations’?” Is there any company in America that wouldn’t happily embellish its “environmental image” by agreeing to that? Now here’s what will really happen…

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I (and many others) estimate that a 500-mile electric truck will require a 1000/kWh battery pack and—with its fancy carbon fiber cab and chassis– will thus cost at least $250,000 to build. Additionally, Tesla is guaranteeing to cap electricity rates at .07/kWh for the first million miles of the truck’s usage; as national rates average around .12/kWh, I estimate this will cost Tesla—on average—an additional $100,000 for each truck it sells, meaning it will supposedly charge $180,000 for a product that will cost around $350,000 to build and subsidize– a typical Musk “business proposition” if I’ve ever heard one! In other words, the Tesla semi-truck will either never be built and sold (hey by the way—where’s the factory and assembly line for that “2019 product”?) or the real price (with the lifetime .07/kWh electricity subsidy) will be around $400,000 (vs. $120,000 for a conventional truck) and all those big-name “reservations” will disappear even faster than the proceeds from a Tesla financing. And oh, by the way, Tesla is actually behind much of the industry in developing an electric truck.

Finally in December, Tesla’s battery supplier Panasonic announced a partnership with Toyota (and possibly other Japanese automakers) that casts a spotlight on how technologically behind Tesla’s cylindrical battery format now is. I urge you to read this excellent summary of the event from The Daily Kanban.

If you’re looking forward to seeing Tesla’s Q4 results, here’s a great summary of what a disaster to expect despite the record number of “deliveries” the company will report in early January. Meanwhile in November Tesla reported an awful Q3, with a record quarterly loss of $619 million (on track to be even worse in 2018) and over $1.6 billion in negative free cash flow. Massive discounting drove automotive

ross margin all the way down to 18.3%, a number already grossly inflated by Tesla’s non-standard calculation method, something I wrote about back in 2014. Tesla also pushed back by three months its prediction of when it would be making 5000 Model 3s a week, a delay that wouldn’t be so bad if it weren’t complete and total bullshit. Additionally, the company refused to reiterate at all that it would be making 10,000 Model 3s a week by late 2018, despite Musk’s statement on the Q2 call just three months earlier that “what people should have absolutely zero concern about is that Tesla will achieve a 10,000 unit production week by the end of next year.” In fact, Tesla now admits that it hasn’t even begun to implement the capacity needed to enable such a production rate. (The discovery process during the multiple ongoing shareholder fraud lawsuits should be fun.) It’s also important to note that the battery storage division had a horrendous negative 33% gross margin, and I urge all of you to listen to the audio from the conference call (don’t just read the transcript!) as it’s one of the most (unintentionally) hilarious things you’ll hear all year!

When the Model 3 eventually does go into real production it will be a huge sales disappointment, as reservation holders realize that only around 100,000 of them will qualify for the full $7500 credit and almost nothing can be done in the car without a multi-step process on the touchscreen—not even changing the windshield-wiper speed, adjusting the air vents or opening the glovebox. Thus, operating a Tesla Model 3 may potentially be as dangerous as texting while driving! And of course Tesla will make little (if any) money on the car, as it currently loses a fortune on models starting at twice the price.

Meanwhile, Tesla is increasingly besieged by a wide variety of lawsuits, for labor discrimination, union-busting, autopilot fraud, sudden acceleration, lemon law violations, investor fraud and, undoubtedly, many others of which I’m not yet aware. And that’s even before it brings in the (inevitable) bankruptcy lawyers!

So here is Tesla’s competition in cars (note: these links are continually updated)…

So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition (and things will only get worse once it does), while its fully diluted market cap (assuming 177 million shares “all-in”) exceeds that of Ford and almost equals that of GM despite a nearly two-billion-dollar annualized net loss selling just 100,000 cars while Ford and GM make billions of dollars selling 6.6 million and 9 million cars respectively. Thus this cash-burning Musk vanity project is worth vastly less than its nearly $64 billion fully-diluted enterprise value and—thanks to its roughly $10 billion in debt—may eventually be worth “zero.”

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